iBuying Is Not Circling The Drain

Zillow launched Zillow Offers, its own version of instant-buying in 2019, with far less success, discontinuing the program last November. In two short years the digital real estate company lost hundreds of millions on its home-flipping business and began laying off what will ultimately be expected to be 25% of its workforce.

“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipate,” Zillow CEO Rich Barton said at the time. “Continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility.”

The decision has led to several lawsuits being filed by shareholders who lost money on the venture.

Was Zillow’s exit a sign that instant-buying’s time had come and gone?

Not according to a recent report from Zillow itself.

The company said the number of homes bought and sold by iBuyers soared to new heights in 2021. The final three months of 2021 saw a slowdown from the third quarter amid the typical winter housing market deceleration. Yet, the fourth quarter still was the second-strongest in history in terms of the number of homes sold using an instant-buying service, according to Zillow’s report.

Then came the first quarter of 2022.

In the midst of saying goodbye to iBuying, Zillow made money hand over fist. Zillow sold 8,981 homes in the quarter, helping its Homes segment produce revenue of $3.7 billion.

As of early May, the Seattle-based online real estate marketplace had just 100 homes not currently under contract to sell remaining on its books, after selling nearly 9,000 homes in the first quarter of 2022. That rapid selloff helped the company post $4.3 billion in revenue in the quarter, up 20% from $1.29 billion a year earlier.

In a letter to shareholders, Co-Founder and CEO Rich Barton said the inventory of more than 20,000 homes the company owned when it decided to shutter its Zillow Offers unit in the third quarter of last year had been reduced much more rapidly than expected.

In the 38 largest iBuyer markets, Zillow determined, homeowners sold 21,523 homes in the fourth quarter using one of the three largest iBuying services: Opendoor, Zillow Offers, and Offerpad Express. That figure represented 1.7% of all U.S. home sales in the fourth-quarter, down from 1.9% in the third. The three sold 21,398 homes during the third quarter.

According to Zillow, iBuyers also purchased 70,402 homes in 2021, more than double the previous annual high of 32,726 homes, achieved in 2019. They also completed 44,933 home sales last year, exceeding the previous high of 28,265 homes sold in 2019.

Offerpad officials said that in three of its markets — Greensboro, Phoenix and Tucson — iBuying reached 10% market share, highlighting the potential growth of this industry.

Brian Bair, Offerpad chairman & CEO, has said that his company expects the market to remain strong in 2022.

“With the current supply and demand imbalance expected to remain, buyers will likely continue to experience an ongoing sellers’ market. Our expectations in 2022 assume that many of the fundamentals driving the 2021 market will remain,” Bair said. “This includes tight supply levels, increasing yet historically low mortgage rates, and wage growth acceleration. Importantly, our growth and expectations for achieving sustainable profitability are the result of a multidimensional strategy that is not reliant on any singular market condition.”

What does the future look like?

Officials at Opendoor, which still leads the market, expressed similar sentiments about the recent past and future.

“For the full year, we acquired a record 36,908 homes, up nearly 500% versus 2020,” said Eric Wu, Opendoor founder and CEO. “Over the course of the year, we saw total offers and real seller conversion reach all-time highs as Opendoor’s value proposition of simplicity, certainty and speed, combined with our robust pricing and operational capabilities, continued to accelerate consumer adoption across our markets.”

Wu said his company “significantly outperformed” the high end of its revenue guidance, “delivering $3.8 billion of revenue in the fourth quarter of 2021 and 1,435% growth year-over year. This outperformance was fueled by the strength of our resale systems, as we leaned into strong market demand for the homes we had in inventory coming into the fourth quarter. For the full year, revenue was $8 billion, up 211% versus 2020. This revenue growth was driven by the aforementioned unit growth, as well as by higher revenue per home sold, up 42% versus 2020.”

Offerpad officials said the company finished 2021 with record results capping off a remarkable year, exceeding growth targets and financial expectations as awareness of and demand for its services continue to grow.

Revenue increased 289% to $867.5 million, and Offerpad acquired 3,049 homes, nearly a threefold increase from the fourth quarter of 2020, and an 11% sequential increase from the third quarter, according to the company.

“The key to our continued success over the past year was growing in a responsible manner, while maintaining high quality, customizable, and valuable service offerings for our customers,” Bair said. “In 2021, we earned an outstanding customer satisfaction rating of 93%. Offerpad is seeing market demand increase as more customers seek the convenience, certainty and control our offerings provide.”

Mike DelPrete, a real estate strategist and scholar-in-residence at the University of Colorado Boulder’s real estate technology program, called 2021 “a transformative, record breaking year in which more homes were bought and sold on the iBuying platform than ever before.” He was also impressed by Opendoor’s ability to demonstrate an expanding operational capacity to repair and sell homes at scale.

“It’s a critical metric, because buying the house is comparatively the easy part,” he said in a report on iBuying on his website. “Selling at scale is more difficult.”

But DelPrete also pointed out that the major iBuyers sold approximately 20% of their inventory directly to investors in 2021, more than double the previous high in 2019. That amounted to nearly 8,000 sales, most of which DelPrete said, were turned into rental properties.

Trending in the wrong direction?

But the news, according to the Zillow report, was not all great.

The company said the median price of homes sold using an iiBuying service dipped to $372,100 in the fourth quarter, but remained above the overall U.S. median sale price of $335,060.

iBuyers tend to operate in larger, more-expensive housing markets, helping skew the national numbers. In 24 of the 33 metro areas for which data was available, Zillow said, the median price of homes sold using an instant buying service was less than the overall median sale price in that metro.

Also in the fourth quarter, the difference between the purchase price and sale price was 1.1%. That was up from a revised 0.7% in the third quarter, but is also the second-lowest number in any quarter since 2018, when Zillow began tracking the data. According to the company, the median markup was 7% in the fourth quarter of 2020 and reached its highest level ever in the first quarter of 2021 when the median markup reached 8.6%.

iBuyers, Zillow said, are also taking longer to sell their homes. The time it took to get a home ready to sell, put it on the market and close reached 98 days in the fourth quarter of 2021, which is three weeks longer than a revised 79 days in the third quarter of 2021 and more than a month longer than the record low of 63 days in second quarter of 2021. The report pointed to winter slowing the housing market as well as labor and materials shortages that contribute to a new-home construction and delaying the speed of repairs and updates to existing homes iBuyers are preparing for sale.

Officials at Offerpad and Opendoor acknowledged that they have experienced some supply-chain issues, but added they were not a major concern. Both companies are confident in the future of instant buying as well.

“It is our fundamental belief that in a matter of years, millions of homebuyers and home sellers will pick a simple, certain, and fast experience and transact themselves, completely online,” Wu said. “More importantly, we know Opendoor’s digital, seamless experience is — and will continue to be —what consumers choose now and for decades to come.”

Overall, DelPrete said he expects less competitive pressure on fees and acquisition prices on the remaining iBuyers with Zillow gone from the market.

But there could be new competition from a group that he calls power buyers, companies like Homeward and Orchard that empower buyers with services that include cash offers, bridge financing, and trade-in programs.

“Like iBuyers, these companies are transaction-focused, but most critically, target buyers instead of sellers,” he said.

DelPrete believes that iBuying has a critical flaw and that is that no one gets excited about selling a home, while the reverse is true for those buying one.

Additionally, he said, power buyers have a much higher attach rate of financial products for mortgages, compared to iBuyers. According to DelPrete power buyers achieve a 70% attach rate while Opendoor managed only 2%.

“They get the financing,” DelPrete said in a YouTube video. “They also don’t have to spend money buying thousands of (sellers) houses.”

Bair, from Offerpad, told shareholders that the company had opened three of eight planned new markets for the year, added 600 new zip codes and increased its service area by 15%. The company is also planning to offer something that sounds a lot like a power-buyer model soon with “Buyer Boost,” a program that provides buyers with the advantage of making an Offerpad cash-backed offer on homes they’d like to buy, Bair said.

What’s next for the market?

Offerpad officials said during the company’s six years of operation they have managed expansion based on their ability to stay months ahead of market trends and adjust accordingly.

“We are a real estate technology company with a deep understanding of the cyclical nature of real estate. The market will always change. You change with it,” Bair said. “Offerpad knows how to buy, renovate, and sell homes quickly and at scale through changing real estate cycles.”

Wu said that over the years he has been asked whether Opendoor’s vision and strategy had changed.

“The short answer is no — we have always been focused on making it possible to buy, sell, and move at the tap of a button. In our view, the end state for the real estate marketplace will inevitably be a simple, certain, and fast transaction powered by technology. It is just a matter of when,” he said.

DelPrete said that with the continued spike in housing prices, he expects the iBuyers to do well in the first half of 2022.

That especially applies to Opendoor, whose houses, he said, were listed for a median of 17% — or $60,000 — higher than what they were purchased for on, on average, 72 days earlier.

Buy-to-list, DelPrete said, is a good leading indicator of iBuyer profitability, and is usually a few percentage points higher than the eventual sales price.

DelPrete also believes Opendoor’s contribution margin is easily on track to outpace 2021’s high of 10%.

Eventually, home prices will come down, and DelPrete said, the iBuyers will need to read the market accurately to avoid the mistakes that prompted Zillow to leave it.